Optimal Trade and Technology Policies: Dynamic Linkages.

This paper examines the dynamic linkages between technology policy on the one hand and tra de and industrial policies on the other. When any of the latter polic ies affects the incentives of firms to innovate, there is an independ ent argument for or against such a policy in addition to those obtain ed from the usual analysis of international oligopoly. The adoption o f an R&D policy involves a dynamic tradeoff in welfare, the pattern o f which depends on whether an R&D subsidy or tax is optimal. Noncoope rative R&D subsidies may lead to Pareto superior outcomes in the pres ence of international technological diffusion. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.